It seems the Volcker / Greenspan era was a massive fraud – the amount of potential wealth not acheived must be absolutely staggering.

This is what happens when you have no real net capital formation for 30+ years
The biggest civilisation killing depression of all time – a truely epic story.
Shame there is no popcorn in the dark ages.

The title of the 3rd session, “Achieving Growth Amid Fiscal Imbalances” is at the top of everyone’s concerns. Stephen Cecchetti’s paper, “The real effects of debt “ is a very easy read, and indeed required reading for everyone concerned by debt (be that private or public by the way). Hopefully people here will read it fairly fully before they feel competent in commenting (and especially criticising).
The premise of the paper is “under unchanged fiscal policy, debt-to-GDP ratios will explode in all but a few countries” (p21) . That is widely illustrated by the literature that Cecchetti references, along with some he doesn’t, such as the rating agency reports.
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“When is debt excessive? When should we worry about its level, growth rate and composition?” are the key questions Cecchetti addresses.
The answers are as could be expected, and generally in line with the literature, if not maybe to the tastes of some here, based on some of the comments in the previous IE post. “Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth” (p20) while “the existence of what might be termed the ‘crowding-out’ effect, whereby higher debt reduces the future availability of credit, is confirmed by separate regressions” (p15)

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At least here, we have some hard analysis and not just ideological puff – 30 years data, 18 countries, panel data with country- and time-specific fixed effects. I was initially sceptical of the data and model formulation, given the risks of endogeneity, the temptation to abuse dummy variables and so on. But this is still a decent stab at updating quickly answers to important questions, especially given, as Cecchetti says, that “policymakers cannot wait for academics to deliver the synthesis that will ultimately come”.

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Ireland is not in the list of 18 countries retained. Adding it doubtlessly would lead to results with the same conclusions, but would you get you thinking about the risks of endogeneity. And doubtless, Cecchetti’s results are even more valid for a SOE like Ireland than many of the larger economies retained in the panel data analysis. But what evidence though that there is much recognition of that in policy?
(Baicker and Chandra’s paper “The Economics Of Smarter Health Care Spending”, also merits close attention in Ireland, although some of its premises won’t please some, e.g. “When public resources come at a cost of lower economic growth, there must be some explicit consideration of the value of redistribution”).

@ Ciaran O’Hagan
‘At least here, we have some hard analysis and not just ideological puff – 30 years data, 18 countries, panel data with country- and time-specific fixed effects’

The analysis is straightforward enough, but the economic concepts and statistical procedures which underlie it are far from simple. The most troubling aspect of the paper is the various assumptions which it smuggles in.

‘Finance is one of the building blocks of modern society, spurring economies to grow. Without finance and without debt, countries are poor and stay poor. When they can borrow and save, individuals can consume even without current income’

It wouldn’t have cost the authors anything to acknowledge that Keynes dedicated his life to showing that modern economies could not be understood without reference to the role of credit and finance. But that would be letting the side down.

They proceed to give a distorted version of mainstream economic history in recent decades:
‘Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing’

No mention of Friedman and the monetarist experiment, which was a calculated rejection of Keynsianism. The message of the Chicago school was that the role of government was to facilitate the business and financial sector and otherwise get out of the road. Consequences for the real economy were not brilliant, so Keynsian demand management was tacitly rehabilitated, but the ‘free market’ ideology retained its grip on the executive.

‘Like a cancer victim who cannot wait for scientists to find a cure, policymakers cannot wait for academics to deliver the synthesis that will ultimately come. Instead, authorities must do the best they can with the knowledge they have’

That’s the big lie. The authorities spend a great deal of time ignoring, misrepresenting, undermining, defunding and otherwise attacking the many economists who point out the elephant in the room. As Mark Twain put it ‘It is difficult for a man to understand something when his salary depends on his not understanding it’. The handling of clerical sex abuse is fine example of institutional blindness, but that sort of blindness is by no means limited to sex or to the clerical world.

There is a bit of tiptoeing through the tulips:

‘And, when investors finance a boom, why is it exclusively through this contractual form? The answers to these questions are probably related to information asymmetries and tax treatment’

Yes. Tax laws were amended to favour debt over equity. CEOs and CFOs lobbied for it so that they could lever their corporations to the hilt, and so massively increase their personal take.

Now we get to the real howlers:

‘First, from the late 1970s onwards, restrictions on financial market activity and lending had been progressively and systematically removed, increasing opportunities to borrow. Combined with improvements in financial theory and information technology, this liberalisation has led to an intensification of financial innovation. The ability to price complex financial products is indeed a prerequisite for manufacturing and selling them’

Let me read that last sentence again. What was the pricing process for the subprime mortgages which got rated AAA ? What were the models for pricing all those autocorrelated CDOs and the like, which led to AIGs bankruptcy ? Not too many papers at Jackson Hole on the Greenspan put I’ll bet.

OK. Debt is an issue for sure. But lets not rely on the advice of those individuals and institutions who have been ideologically captured by the financial services industry. No personal offence intended. For a more objective, and more economically literate view, I strongly recommend Steven Keen.http://www.debtdeflation.com/blogs/

As for the the Baicker paper, it could have been written 30 years ago. Things have just got worse in the interim:

‘Health care is different from other goods in many ways that may interfere with the efficient allocation of resources based on marginal costs and marginal benefits: patients have limited information about the benefits associated with the care that they purchase (relying on the suppliers of that care for advice), and often need to make decisions in difficult circumstances; both insurers and providers often operate with limited competition’

Lets face it. In our modern economy, consumers are confronted with monopoly providers and global cartels at every turn of the road. Healthcare is full of information assymetries and principal-agent problems. Both private and public patients are often powerless in the face of an ever expanding and multi faceted health business. Good things are done, but we are piling up the externalities.

‘U.S. corporate laws also make it difficult for insurers and hospitals individually to reduce the use of technologies with variable payments: insurers and hospitals are not permitted to interfere with the medical judgment of physicians. State laws also require insurers to pay for any medically necessary service as determined by a physician’

‘‘When Medicare covers Provenge for prostate cancer (at a cost of over $90,000 for a few weeks of survival) or the latest cyclotron-based proton-beam therapy (an unproven treatment with a 120 million price tag requiring a football field sized accelerator), private insurers are likely to follow the coverage decision to avoid litigation where their patients claim that insurers are withholding valuable care’

The fact that physicians (and medical corporations in which physicians have substantial stakes) have a massive conflict of interest in nowhere mentioned in the paper. OMG. Where is the governance ? As long as we go on believing that membership of a professional club is some sort of guarantee of moral probity and civic mindedness, we will continue to go further down the hole.

“Debt is BAD for growth” Er, do I take it that emitting truely massive amounts of unregulated credit (aka: money) was a mistake?

It has been known and acknowledged since Biblical times that debt was an all devouring gremlin. So, the correct thing to have done was keep the lid on that damn box. But no. Theoretical sentiment (with the assistance of numeous brown envelopes) triumphs over millenia of reality. We have a REAL bad predicament. Its a political matter, and political critters are in no position to put matters to right. Well, so far anyway. Keep an eye on those Op Polls.

Er, that paper on growth. No mention of the little matter of declining fossil fuels. Now that would not be a problem, would it? No! Absolutely not. Dear God!

Hey Dork, do you think its wise to advise some of the ‘sensitive’ souls on this site about KD? After all, the man’s a complete raving sack of sanity and practical wisdom. I took his advice:got my pension into a life-raft ‘afore the ship foundered.

@Brian
Well I don’t agree with everything the man says – I think he was blind sided a bit by Golds rise – because he does not understand the eurosystem to the same degree , and he can be a bit too nationalist for my taste.
But he is still one of the best market analysts out there.
He is right though – if the euro / gold thingy gets destroyed the only thing left standing will be the dollar.
However the FED / ECB / BIS have other plans.

@Brian
Well I don’t agree with everything the man says – I think he was blind sided a bit by Golds rise – because he does not understand the eurosystem to the same degree , and he can be a bit too nationalist for my taste.
But he is still one of the best market analysts out there.
He is right though – if the euro / gold thingy gets destroyed the only thing left standing will be the dollar.
However the FED / ECB / BIS have other plans.

Wow. Rogoff says that Richard Koo may be right. This is like turning an oil tanker. It takes about 50 miles, but at least he sees that the first thing to do is to prise the bankster’s paws off the tiller.

@ Paul The purpose of the Cecchetti paper is to provide evidence (not just simply chat) about the questions he asks, “When is debt excessive? When should we worry about its level, growth rate and composition?”. So these are practical questions, and Cecchetti provides analysis / numbers in trying to answer those questions, as you will have seen when you read the paper. Cecchetti does reference some 60 papers in the literature. But other the big issues you raise is beyond the scope of what Cecchetti’s work.
I wouldn’t suggest the “analysis is straightforward enough”. It was actually quite a lot of work and required quite some thinking as to how to specify the models, and there are always fears that you are going down the wrong road. There is quite a lot more work that could be done, and with the passage of time, new data is turning up.

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You suggest the Baicker and Chandra paper could have been written 30 years ago. Hmm. The paper is a review of the literature, drawing largely on their own data work. It is actually very unusual to have such a micro-oriented paper on health presented at Jackson Hole, and it is interesting to ask why. That of course reflects concern from macro policy makers (whatever their politics) about the build-up in debt. Given the speed of technological development, our ability to spend money on health care is exceeding our capacity to finance that spending in any reasonable amounts. Among the data Baicker and Chandra analyses, I thought the evidence at explaining the decline in mortality from coronary disease since 1980 (your 30 years) was quite revealing. The policy implications for the improvement of efficiency appear clear.

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@ Brian you suggest debt is an “all devouring gremlin”. If you read the Cecchetti paper, you may come to different conclusions. Indeed every healthy economy needs properly functioning channels of credit.

@Ciaran
Why do we need credit for consumption ?
I would contend no credit is needed for what was once considered “capital” goods such as houses for decades, hopefully centuries.
Credit is obsolete for now.
Just increase the MONEY supply by 2%- 3% a year building infrastructural projects , people can use cash to buy consumer products.

But what we actually got was a massive Ponzi scheme. There are both distal and proximate causes for this – but most commentators appear (please correct me if I am mistaken) to be focusing on the proximate, salient features, not the long, drawn-out processes which led up to the absolute need for the financial industry to turn to fraud to ensure an adequate return. So, our politicians are faced with the predicament: reward or punish the fraud. So far its the former.

The Biblical solution to excessive debt was the Jubilee. This is what we have to do. OK, so when you press that RESET button you lose your unsaved data. So be it. I do not like this option, but it does work. That is, it is NOT a successful failure. Its a successful success.

The lack of international comparisons in the Baicker and Chandra paper is puzzling.
There is no discussion of why US health outcomes are so far behind those of countries with much lower levels of health expenditure.
For example, according to OECD data, the US spends $PPP 7,950 on health care compared to $PPP 3,781 in Ireland, but life expectancy at birth in the US is 78.2 years compared to 80 years in Ireland. The US infant mortality rate is 6.5 per 1,000 births, the Irish is 3.2. In fact, despite having much higher levels of health spending, the US underperforms most European countries on almost all available indicators of health status.

I would have to read the paper again to fully absorb it but it seems to be much along the lines of recommending that the best way to deal with poor road safety is to bleed less when involved in an accident.

From the paper “Why has debt been rising so steadily?”

First, from the late 1970s onwards, restrictions on financial market activity and lending had been progressively and systematically removed, increasing opportunities to borrow. Combined with improvements in financial theory and information technology, this liberalisation has led to an intensification of financial innovation. The ability to price complex financial products is indeed a prerequisite for manufacturing and selling them

When mentioning the “increasing opportunities to borrow” you might also mention that this was predicated on there being more opportunities to lend, it seems truly odd not to further explore the role of “financial innovation” in the ballooning of debt and asset prices since 1980, it is particularly shy given that we are still in the throes of a global financial crisis. The much mentioned declining real levels of wages for the median US worker since about 1971 should also get a nod when explaining the increase of private debt there.

The papers authors do suggest (in the very last sentence) that perhaps we should be “reducing both direct government subsidies and the preferential treatment debt receives.” but the paper otherwise seems to pay no attention to the financial system behind the curtain.

p.s. Fascinating to read that Krugman is persona non grata at Jackson Hole due to his premature anti-Greenspanism in the early noughties. Do not remark on the emperors new clothes, it makes every one else look foolish.

“That of course reflects concern from macro policy makers (whatever their politics) about the build-up in debt. Given the speed of technological development, our ability to spend money on health care is exceeding our capacity to finance that spending”

This is the problem with ‘macro’ policy makers. No ‘macro’ thinking there, only ‘micro’ pretending to be otherwise. So long as there are resources to be purchased by a government with a sovereign, fiat, floating currency (& using no other currency), it can purchase all it wants to buy. Please notice that there are some conditionalities in that last sentence, but ‘finance’ isn’t one of them.

Of course, Ireland does not have a sovereign currency although there’s no reason why the euro could not have a ‘sovereign’, in macro economic terms. Maybe we need to think about that.

The entry of China to the world trading system and the collapse of communism a decade later in Europe triggered falls in inflation and interest rates.

In countries such as the US, worker earnings stagnated or fell while rising property prices coupled with easy credit gave an illusion of prosperity.
France provides a useful illustration; every year since 1975, it has run an annual deficit.

A French male can enter the workforce at 24, retire at 59 and live to be 75 — with 40 years of dependency in total.

When debt gets too high in that type of system, some sections of the population have to be shafted to pay for the rest.

Hard to read it as anything else. The core EZ banks are sh***ng bricks. Interesting to consider her comments about sovereign debt and growth. Like Ken Rogoff, maybe she’s starting to listen to Richard Koo.

‘Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery. The precise path is different for each country. But to meet the credibility test, each country needs a dual focus: a primary emphasis on durable measures that will deliver savings tomorrow which, in turn, will help to create as much space as possible for supporting growth today—at least by permitting a slower pace of consolidation where possible. For instance—measures that change the rate of growth of entitlements, health or retirement…
.. First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic upfront belt-tightening—if countries address long-term fiscal risks like rising pension costs or healthcare spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail’

How credible is Ireland’s financing path in circumstances where growth porspects are so poor ? We import twice more in energy than we export in food products, and public spending is the main motor of the domestic economy. A bolted on FDI sector won’t save the day.

Does she really accept that legislators are going to funk out? That Neoconservatism (Neorealism) sentiment will trump? Skates around this conundrum.

Most unrealistic opinion about the emerging ones. Rebalancing? What in God’s name does this entail?

Could someone with access to the relevant data please do the sums.

Assume, (yeah, I know, but hey, I’m a fan of Milton an all!) that global pop is static. Ditto for global oil production. Assume, you give one extra litre of fuel to each person in each of the emergings, by deducting from developed. What’s the nett? You Do need fuel for growth.

What would happen if those emerging all got serious about personal freedoms and security of private property and went for all-out free trade and unfettered monetary flows? Think that they might want more than just one extra litre per person?

Daily crude production is – give or take, 85 mil-b/d ( ~14,000 mil l/d ). Chindia + east asia has how many souls? Say, 3,000 mil. Er, that’s a lot of folk. So the developed would ‘lose’ this quantity – spread over how many folk? 1,000 mil? Sounds like fun. Less oil, less ‘growth’. Opps!

Or, maybe we should just take a rain-check on this rebalancing lark.

There is a man in Kerry whose kids are hungry. This is what you have to watch out for. Desperate folk with hungry kids. If our legislators fail to institute ‘prompt corrective action’ on this one … …

@PR Guy
Thanks for the link.
As Gavin asks…where does this leave the bank stress tests….I am inclined to think they are once again discredited. Just looking around at the share prices of very large banks it would appear that the markets have already discounted them. RBS at about 22p ,Lloyds at about 29p, Unicredit 92c, Commerzbank 1.96 etc would make you wonder are they going the way of our banks.

Not that anyone really took them that seriously by the end of the weekend after they came out. As I recall, C. Lagarde was on record somewhere saying that they were fine. She’s obviously seen the real figures since she took over at the IMF.

Am I right in thinking DSK was all for letting banks fail if they couldn’t cut it whereas CL is all for keeping them propped up? No wonder ‘he was resigned.’

It’s pretty clear, the situation is ‘insolvency’ not liquidity & is very precarious. The ‘domino’ effect of counter party leveraged positions means another ‘Lehmans’ might not be able to be contained.

There really is only one solution. Aggregate demand in the real economies of US UK & EU must be increased. Even tho’ Roubini doesn’t have anything much else of interest to say, he was right to point out what Marx said about the limits of Capital’s share of the pie from unproductive activity (gambling) on the backs of people who actually produce tangible wealth.

Snag is, the sensible thing to do – sovereign currency governments’ debt free spending in direct job creation – blows the lid on the banks’ scams, not to mention the near lifetimes of flawed work of the legions of ‘serious’ economists. That would never do.

@ Brian woods Snr
Excellent point about redistribution, but you can only see the obvious if you remove yourself from the fiction that somehow money is something that drives the economy and not the other way around.

I read the first chapter of Keynes’s consequences of the peace, and he essentially said the same thing about Europe in the early 1900′s. To illustrate his point he described Europe as the industrial base and the US as the food basket, the problems surfaced when the US industrialized and it’s populations grew to almost match that of Europe, at that point, hours worked to earn minimum calorie intake went up, because the US was absorbing it’s own production….the cracks were already in the system he argues.

On the debt piece, congrats to the authors, at last something that a) tackles the issue of debt and b) is prepared to say that what feels good initially can turn increasingly bad as debt levels grow. My criticism would be why can’t they use data sets that extend beyond one credit cycle? Since 1980, inflation has been falling and nominal interest rates have fallen faster than inflation, that was a dream landscape for the financial sector. The rational act was always to borrow, because in three years, the cost of debt would be lower both in real terms and in nominal terms.

Today, real interest rates are negative for most countries (sadly they went from negative in real terms in Ireland from the 1990′s to 2006 to sharply positive since then). At some point they will rise and when they do, all sorts of bad stuff, that is already in the cake mix, will float to the top….

@: Bklyn_rntr: “At some point they (interest rates) will rise and when they do, all sorts of bad stuff, that is already in the cake mix, will float to the top….”

Ah! Yes! Hardly a mention about this. 7% might be likely. Sink a few vessels would this. Maybe we should strees-test all residential mortgage holders to see what 7% would do. Triage them according ability to repay: can’t; possible; probable. Then frame the necessary legislation on this basis.

However, it looks like our legislators will fiddle, fluster and finagle, until they settle on the wrong solution – again! Now if it were a ‘systemic financial crisis’ the Dáil would have be re-called by now.

Good article by Ulrich Beck in Der Spiegel arguing for Eurobonds…I like the description of Angela’s moves…
“Merkel adheres to the Hegelian idea by preferring the detours of reason. To use the metaphor of dance: two steps backward, one step to the side, then a magical, lightning-quick about-face, softened by a tiny step forward — in much the same way as the coalition government in Berlin is hopping, stumbling and tumbling its way forward, dancing to music that neither the Germans nor the other Europeans can hear or comprehend. While former Chancellor Helmut Kohl warned against a German Europe and sought a European Germany, Merkel advocates a German euro-nationalism, putting her faith in the ability of Berlin’s regulatory and economic policy to heal Europe’s wounds.”

Not sure if interest rates will rise in the states – they cannot until global trade is restructured dramatically.
I understand interest as wealth extraction – if there is little wealth now after at least 40 years of malinvestment why should interest rise ?
The credit hyperinflation (oil glut ?) of dollar assets especially since 1980 was needed to feed interest income in treasuries (where else does interest income come from in this monetory system ?)
Otherwise the States would have been forced onto a Gold Standard in 1980.
Now we will get /are getting hyperinflation of base dollars (world savings) – but if the FED increased interest rates global trade would break down as not enough dollars would be available for exchange.
This is what happens when you hybridise token money with the exponential debt in the global reserve currency – HYPERINFLATION
Maybe the Euro will save us to some extent from this global shock / maybe not – but I believe it was designed for this outcome – how good a design is open to question.
But those stupid dollar pilots forgot to check the oil pressure.http://www.youtube.com/watch?v=aZdp46Jen_w

Brian Snr,
Part of the “efficient markets hypothesis” prices are always an optimal reflection of all information in the market, and as such they can only fall.

dork,
Why couldn’t they? Today, the game is to soak up some of the saving base to buy time. At some point either global activity will accelerate and debt levels can “normalize” or it won’t. if it doesnt, then at some point savers will strike by hoarding cash/gold/anything but treasuries to force some increase in real rates.

Today, the extractive industry (finance) has such a powerful hold on the powers that be, that they see no limit to the amount they can extract… activity can fall at an accelerating pace. Effectively rates are sky rocketing, even though nominal rates remain at zero. This IMO is the most likely scenario for the next two to three years because the solutions offered all demand borrowing more and faster from a dwindling savings pool.

@Bkyln
I don’t know , maybe the FED can keep interest rates low for a decade using their monetory operations – they have already did a QE3 lite when they signaled that interest rates would remain low for a long fixed time period spooking funds into treasuries without doing anything directly themselves
They still have control of the worlds reserve currency – just about

“Achieving maximum long run growth” somehow reminds me of Fukushima. And the communist planning model. And shortcuts. And the need to measure things well but never doing it properly. If we had to be defined it would be “the consumers who believe in growth”. Even the Chinese are into it now. The straight lines. They used to believe in circles . Will the generation after next look back on us and ask WTF ? Will they study the CAPM and EMH in history along with other examples of nonsense from the past ?

“Where the FT disagrees, is in Ms Lagarde’s willingness to allow taxpayers to act as unpaid lifeguards for the financial system – rescuing the banks if private investors will not. This shifting of risk from bondholders was a bad idea in Ireland and generalising it across the eurozone will not improve it. It would be better to fill capital holes by mandatory debt to equity swaps that put unsecured bondholders where they belong – behind both taxpayers and depositors”